What is the Book Value Startup Valuation Method?
The meta image of this post is the result of using the sentence "A Blue Jay drawn in Art Nouveau" in Stable Diffusion.
What is it?
In the public and profitable companies universe, the book value of an asset represents the price as purchased in the balance sheet with its accumulated depreciation subtracted.
In the case of a company, it represents the total sum of assets, tangible (machinery, real estate, materials) and intangible (patents, copyrights, brand value, network) less the liabilities (deferred tax, mortgages, bonds, debt in general).
On a personal note, this method doesn't fit exactly to be a good method for startup valuations as the calculations rely solely on quantitative methods and hard numbers. Say, for example, a startup developing software for a niche market. This software leverages a combination of technologies such as Machine Learning & Blockchain. The problem they solve is very concrete and the total addressable market is small. Still, customers are other businesses that would cut operational costs up to 20% by using this solution, so they'd be willing to pay big time for a subscription to the platform.
The total tangible assets of the startup are the computer equipment and not much else. The company doesn't own land, buildings, or machinery. The intangible assets are very hard to estimate, while the liabilities are the software operational costs, engineers' salaries, marketing budget, etc...
On paper, and using the book value method, the valuation would be pretty low, while the potential upshot of the company might be way higher than the result of this valuation.
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